If you run your own business and are thinking of setting up a limited company, there are various reasons as to why this may prove advantageous from potential tax savings to reduced personal liability. However, the process of forming a company can be longwinded, and there are several things to consider before you can begin.
What Is a Limited Company?
A Ltd company is a legally separate business entity from its owners (shareholders) and managers (directors). This separation gives limited liability protection, i.e., personal assets are protected if the company incurs debts or is sued. Profits are liable for Corporation Tax (currently 19–25% in the UK) and shareholders are paid dividends, which can be more tax effective than sole trader profits.
Limited companies must be registered with Companies House and adhere to strict reporting requirements, including annual accounts, confirmation statements, and updates on directors or shareholders.
Steps for setting up a limited company
In order to set up your limited company, you will need to submit an application to Companies House. This can be done via electronic means or by filling out the IN01 form manually and posting this. Alternatively you may wish to consult an accountant and instruct them to oversee your application. this will ensure that all information is correct and give you the best chance of having your form approved quickly.
Whichever route you decide to pursue, you will need to make a number of crucial decisions before you can begin your application and will also need to have all the required information to hand. Keep reading for our rundown of the key considerations.
1- Is a Limited Company Right for You?
Before incorporating, assess whether this structure aligns with your business goals, risk tolerance, and administrative capacity.
Advantages of a Limited Company
Limited Liability – Personal assets (e.g., home, savings) are protected if the business fails.
Tax Efficiency – Corporation Tax rates may be lower than Income Tax, and dividends have separate tax allowances.
Professional Credibility – Clients, investors, and lenders often prefer dealing with incorporated businesses.
Growth & Investment – Easier to raise capital through share sales or business loans.
Advantages of a Limited Company
Public Disclosure – Key details (directors’ names, profits) are publicly accessible via Companies House.
Complex Tax Rules – Salary vs. dividend planning, VAT registration, and expenses claims require careful management.
Higher Compliance Burden – Annual filings, record-keeping, and potential audits.
Who Should Set Up a Limited Company?
✔ High-earning sole traders (earning over £50K+ where tax savings outweigh admin costs).
✔ Businesses with liability risks (e.g., contractors, consultants, trades).
✔ Startups seeking investment (investors prefer shares over informal partnerships).
Who Might Prefer Simpler Structures?
✖ Low-risk, low-revenue side hustles (sole trader may suffice).
✖ Short-term projects (dissolving a company incurs costs).
✖ Those uncomfortable with paperwork (self-assessment as a sole trader is simpler).
Next Steps: Use HMRC’s online tool to compare structures, or Consult an accountant for personalised advice.
2- Choose your company name and address
A company name may not sound like a big deal, but it’s important to get it right. Moreover, there are some restrictions: your name can’t contain any trademarks, for instance, and it must be unique and appropriately reflective of what you do. Conduct a Companies House name availability check and secure a matching domain early to avoid rebranding headaches.
If you are forming a company in England or Wales, you must have a registered address within that country. Official mail will be sent to your registered address, so you should ensure that you give appropriate details. This doesn’t mean that you need to operate out of separate business premises; many business owners utilise virtual PO box or receive company mail at their private residences.
3- Who Will Run the Limited Company?
Limited companies need to have at least one director, so this is the first port of call.
- Directors assume legal responsibilities, including:
- Submitting annual accounts and confirmation statements.
- Avoiding wrongful trading (continuing operations despite insolvency risks).
- Acting in the company’s best interests (fiduciary duty).
It is no longer compulsory to nominate a company secretary, though you may find it helpful to have one company secretary fulfils several useful functions. such as overseeing high level administration (communications with shareholders, for instance) and corporate governance.
When you are filling out your application, you will need the following details to hand:
- Full names of all those holding official positions.
- Nationalities and dates of birth.
- Their addresses. Directors may choose to give what is known as a ‘service’ or ‘official’ address to protect their privacy.
4. Register you company
Now register your company with company house. You need sufficient business records to file accurate company tax returns and pay the corporation tax. To register Complete the IN01 form and post it to Companies House Or complete the online registration.
Deciding if your business is ‘trading’ can be confusing, as it depends on what your business does. HMRC has clear rules on what counts as active trading non trading or dormant. It is important to check these so you give the right information to HMRC.
Once Companies House approves the company, they will issue a certificate of incorporation with a company registration number. They will also inform HMRC of the new company. HMRC will later send a letter with a 10-digit Unique Taxpayer Reference (UTR).
5. SIC Codes: Defining Your Business Activities
When setting up a limited company, you will need to define the nature of your work by choosing an appropriate ‘Standard industrial classification of economic activity’ code (SIC). These range from manufacturing to the leasing of property, and a full list can be found on the Gov.uk website.
On the form, you’ll be given the opportunity to enter up to four codes; so if you aren’t sure that all your professional activities fall neatly into one bracket, you can choose a number of codes to suit your business interests.
6. Who Will Hold Shares?
The appointment of shareholders and the division of shares are matters that deserve serious consideration. Even if you intend to run the business alone, there may be tax benefits to apportioning some shares to a spouse, for instance, rather than holding all the shares in your name.
Remember, too, that when the time comes to draw on dividends, these must be distributed proportionally in correlation with shareholding percentages. The legislation surrounding shares and shareholders can be complex; as such, we highly recommended seeking tax advice from an accountant before committing yourself to any particular action.
When the time comes to appoint your shareholders, you will need the following details:
- The full name and address of each shareholder.
- The number of shares and class of shares they will own.
- As you will not be able to take a signature from each shareholder to verify their identity, three sets of personal information will need to be submitted instead, such as: their NI number; their mother’s maiden name; or the town they were born in.
As well as providing information on shareholders and other company officials when setting up your limited company, you will also need to keep a record of ‘People of Significant Control’ (all those who have 25 or more of the voting rights, and/or those who own 25 or more of the share capital). This information must be submitted to Companies House each year through the company’s annual Confirmation Statement.
Pro Tip: Draft a shareholder agreement to preempt disputes over transfers, valuations, or exit scenarios.
7. What Rules Will the Business Be Governed By?
In simple words create your company documents. There are 2 vital documents that all companies must possess:
The Memorandum of Association
The Memorandum of Association is the template for setting up the company: it’s essentially a confirmation that all initial shareholders agree to form the company in the first place. It must contain the following wording: Each subscriber to this memorandum of association wishes to form a company under the Companies Act 2006 and agrees to become a member of the company and to take at least one share. A list of all ‘subscribers’ (shareholders) should also be enclosed.
Articles of Association
Articles of Association The Articles of Association, by contrast, is a template as to how the limited company will be run: it governs everything from voting rights to the specific powers of the directors. You can draw up your own set of Articles, though most choose to use the model articles provided by Gov.uk – by doing so, you are able to submit your application online (if you choose to draw up your own, unique document, you will need to file your application via post and enclose a copy of the Articles within).
8. Other Considerations
- Tax obligations for limited companies and sole traders are very different – and HMRC won’t wait for you to figure it out. It’s important that you hit the ground running, so do seek proper advice sooner rather than later. You’ll need to register for corporation tax within three months of trading as a company, for instance, and you may need to register for VAT (if turnover exceeds £85,000). Voluntary registration can reclaim input tax.
- Similarly company directors have specific financial and legal obligations, so it is important that you are fully apprised of your responsibilities.
- When it comes to running or setting up a limited company, the paperwork involved and records required are specific and unfortunately more onerous. Make sure that you are aware of your responsibilities, particularly when it comes to maintaining statutory records. Enroll in PAYE if hiring staff, and procure employers’ liability insurance.
Final Thoughts
While DIY incorporation is feasible, missteps in share allocation, tax planning or compliance can prove costly. Engage an accountant or corporate solicitor to align your structure with long term goals whether that’s scaling, securing investment, or optimising tax.
By addressing these facets methodically, your limited company will be positioned for operational resilience and financial agility.
